Prior to the Release of the Key Inflation Report, Wells Fargo Delivers a Warning Regarding the Federal Reserve

Michael Schumacher of Wells Fargo Securities believes one thing is clear as Wall Street gears up for important inflation data, and that is: “The Fed is not your friend.”

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Having said that, he warns that investors will likely be on the wrong side of the trade as a result of Jerome Powell likely holding interest rates higher for longer.

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“As you consider the history of the last 15 years, you realize that there has been a lot of change. There is always a Fed that rides to the rescue whenever there is weakness in the economy. It's not going to happen this time. There is only one thing the Fed cares about when it comes to macro strategy, and that is inflation," the company's head of macro strategy told Trade Algo on Monday. “In other words, forget the idea of lots of easing in the near future.”

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Labor Department is scheduled to release its January consumer price index, which reflects the prices for goods and services, on Tuesday morning. On Thursday, the producer price index will be the topic of discussion.

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“The inflation rate could come down quite a bit in the coming months. Nonetheless, we still do not have a clear understanding of where we are going," Schumacher explained. “[That] makes a big difference to the Fed - whether it is 3%, 3.25%, 2.75%” he continued. “This is something that is up in the air at the moment."

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A Fed that is adamant about keeping inflation under control cannot coexist with the early momentum of the year, according to Pickens.

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“A higher yield... does not bode well for stocks," said Schumacher, who believes market optimism will eventually fade. Nasdaq has so far outperformed other tech-heavy indices this year S&P 500 is up almost 14%, while the broader index is down. There is an increase of about 8%.

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The risks associated with China's spy balloon fallout and tensions between the US and Russia are also expected to create extra volatility, according to Schumacher.

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Schumacher still prefers to invest in the 2-year Treasury Note, as it is relatively safe and offers some upside potential. He recommended it during an interview with "Fast Money" in September 2022, saying it's a good place to hide out from the world. There has been a 15% jump in the yield of this note since the interview, where it yielded 4.0%.

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The Fed is expected to hike rates three more quarter-points this year, according to his latest forecast. Thus, we should see a rise in yields as a result of this. Schumacher does note, however, that there is still a possibility that Fed chief Powell could change the course of the economic policy.

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In Schumacher's opinion, "a number of people on the committee are fairly dovish," Schumacher explained. There is a possibility that the Fed may speak to Jay Powell and say: 'Look, we can't go along with additional rate hikes in the event that the economy looks a bit weaker if the job picture darkens a bit.' There may be a need for a cut or two in the near future. He may lose that argument."